Roth now or Roth rollover later?

[PhrugalPhan]

Hello, I am a lurker of this site for the past few months, and decided to sign up and ask a question about Roth IRAs and rollovers. Hopefully this will start an interesting conversation.

A little background about me. I'm 52, currently planning to retire at 60 at my first opportunity when I can walk away from this job with a full pension (though maybe I will leave earlier if it makes sense). Its a local gov't job with a very stable county gov't, so I consider the pension very safe. If I stick with this job until I am 60 then my pension should be in the area of $45k/year. Additionally, if I can make it until then, I will also get a supplimental "Social Security Benefit" from the pension until I am 67, bascially paying me what I would get in SS benefits from retirement until my 67 birthday. The idea is (I think) to keep me from needing my SS benefits until then, so I can get them at a fuller amount for the remainder of my life. The last SS benefit report I received (from the government) estimated my benefits at around $2,300/mo., though the SS supplement I would get from my pension for those 7 years is about $2,500 per month (per their estimates).

With all that said, it looks at the moment I will be getting from age 60-67 the amount of $70,000/year (dropping to $45,000/year after). I am currently single (though happily in a relationship) and am putting not only $6,500/year in my Roth IRA, but I am also putting 1/2 of my yearly 457 plan contributions in as Roth-ified (post tax) contributions (which I am also maxing out). I would like to save as much on present & future taxes as possible (who wouldn't?) and am trying to see if it would ...

(A) be possible / practical / make sense to maximize my tax benefits today (that is - no Roth contirubtions in the 457 plan) and instead Roth-ify some of my 457 account yearly by taking out withdrawals and rolling them over into my Roth IRA when I retire. With this plan, I will wait until 70 to start taking SS benefits.

OR

(B) make sense to Roth-ify as much as I can today (that is - stay the course) as it won't make sense to try and take contributions out and Roth-ify them in the future when I am retired (due to too much pension income)? With this plan I would start SS benefits at 62 and invest them instead of waiting until 70. (Or will I be getting so much from the pension - $70,000 - that I should wait until 70 for SS payments due to tax issues?)

Last year's MAGI was about $63,000 using my current contribution ratio (about $18,000 saved as Roth - post tax, $11,500 went in as traditional - pre-tax). I am doing ok with the small paychecks as my expenses are extra small, and am even adding to my brokerage as my savings are increasing each month. I don't have a mortgage (house is paid off), and while I itemize, the benefit is only a few hundred over using a standard deduction. When I retire, I suspect a standard deduction will be the way to go.

Any ideas, or do I have it pretty well covered at this point? Thanks.

 

[MBAustin]

I'm going to leave the detailed answers up to the folks who really dig into these things.

We were blessed to have income over the limit to contribute to Roths while I was working, so didn't have a similar option. I have been Roth-ifying some each year before I start my pension next year, but haven't really made a dent in it. I think if I had had the option to contribute to Roths while working I would now have been glad I did - but that's not based on a calculator, just my gut feel.

 

[GalaxyBoy]

I'm no expert but I wanted to be sure you are aware of what the Boglehead's Wiki has to say on the subject. I'm re-evaluating my own position and anxiously await the responses from the Forum.

 

[Animorph]

I assume your current income is probably larger than your coming pension? It's all dependent on your taxes. You'll have to make your best tax estimates and see what makes sense. If you can convert to a Roth at a tax rate equal to or less than what you are likely to pay when you start taking RMD's, then do it. That includes making Roth contributions now if your tax rate is OK, or doing Roth conversions later if you will have a lower tax rate in the future. Too late in the day for me to be more specific.

 

[MooreBonds]

Interesting situation from a tax perspective.

Looks like your MAGI now and your approximate gross income from 60-67 will be almost the same! So from that angle, it would make more sense to favor the ROTH.

One other issue is your balances in your current traditional 401k/457/etc. deferred accounts that you'll have RMDs from starting at age 70? What would your RMD be from roughly 70-75? How much would that increase your taxable income? If just a few thousand, might not be bad to have a little tax diversity and keep funding both traditional and ROTH accounts (my favorite example: the gov't is double taxing up to 30% of the social security payments you receive, if your income is high enough, so the precedent is already set to double tax retirement accounts, and I wouldn't put it past them to hit up ROTH accounts at some point down the road).

If your current traditional 401k/457/etc. accounts are high and your RMDs starting at 70 would be more than, say, $10,000 and push your taxable income up to more than what it is now, then I would gamble and put a little more into ROTHs now, with the assumption that tax rates will only go up down the road.

 

[PhrugalPhan]

Thanks for the guesstimate as to what would work for me. Looking at the IRS publications, if I read it right, my RMD starting at 70 based on today's balances would be close to $20,000. Figure that will go up at least 50% in 18 years (and probably much, much more than that) and I guess that emphasizes I am doing the right thing by putting so much into Roths right now.

I guess I don't understand just how SS payments are taxed up to age 70 and how that would play into my possibility to roll over traditional retirement money into Roths from 60-70.